House Financial Services Prepares Banking Regulatory Relief Bill

The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing March 18 titled "Preserving Consumer Choice and Financial Independence." Behind this cryptic title is the beginning of a legislative process intended to provide relief from regulations that community banks and credit unions claim has increased the cost and complexity of regulation so much that they have had to deny mortgage credit or even exit that business.

The witnesses represented the trade associations for the largest and smallest banks and credit unions plus a Georgetown Law Center professor named to the panel by the Democrats, who are entitled to appoint one witness to each hearing panel. Intriguingly the witness for the American Bankers Association (ABA), Tyrone Fenderson Jr., represents a small $60 million-asset bank in Mobile, Ala., that is one of only three national banks owned by African Americans.

The ABA represents banks of all sizes, including the "too big to fail" banks, whereas the Independent Community Bankers of America, which was represented by J. David Williams, CEO of Centennial Bank in Texas, serves only community banks. Williams complained that new mortgage rules under Dodd-Frank have required his bank to reject mortgage applicants it once approved.

In his opening remarks, Hensarling declared, "Of all of the priorities of our committee, none is more urgent than providing some regulatory relief for community banks, and they are not perishing by natural causes."

Rep. Maxine Waters, D-Calif., the ranking Democrat, responded that she has tried to work on bipartisan regulatory relief legislation in the past and will do so in the future but is "highly skeptical" that the banking lobbies "are doing anything but crying wolf." She has accused the large banks of using community banks as stalking horses to obtain relief from Dodd-Frank legislation for themselves.

The hearings will provide an opportunity for the committee to learn more about the state of the banking industry, and the analysis will be complicated. When Waters asked Adam Levitin, a professor at Georgetown University Law Center, about a Harvard working paper that found a vast decline in community banking since the enactment of Dodd-Frank, Levitin called the paper "not really a scholarly study," because it assumed that because two events happened, one was caused by the other. However, the decline in the market share of banks has proceeded for many years. Yet Levitin pointed out that in the fourth quarter of 2014 community banks took share from the largest banks and grew 28 percent.

With mortgage rules the big-ticket issue, there is a danger that it could get caught up in the larger debate over so-called mortgage finance reform, which many observers believe will go nowhere until after the 2016 election and this writer has always predicted would languish because the industry finally has a friendly regulator, former Rep. Mel Watt, D-N.C., in place as director of the Federal Housing Finance Agency (FHFA), and the agenda appears to be "Semper Fannie and Freddie," the restoration of the housing government-sponsored enterprises and the FHA as the dominant players in this market.

In spite of Waters' misgivings, the House is likely to pass some form of regulatory relief, and the fate of the package will be then determined by the new Republican Senate. Whereas the Democratic Senate routinely ignored House bills, this Senate is likely to produce its own bill.

(Archived video, witness testimony and the staff memorandum can be found here.)